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August 2015

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August 2015

Is the IRS About to Issue Regulations That Will Challenge Valuation Discounts Via Family Entities?

Over the past few decades, valuation discounting through the use of family-owned business entities has become a popular estate and gift tax planning technique. If structured properly, the courts have routinely validated discounts ranging from 10 to 45 percent. Valuation discounting has proven to be a very effective strategy for transferring wealth to subsequent generations. It is a particularly useful technique with respect to the transfer of small family businesses and farming/ranching operations. Similar, but lower, valuation discounts can also be achieved with respect to the transfer of fractional interests in real estate.

The basic concept behind discounting is grounded in the IRS standard for determining value of a transferred interest – the willing-buyer, willing-seller test. In other words, the fair market value of property is the price it would change hands at between a hypothetical willing-buyer and a willing-seller, with neither party being under any compulsion to buy or sell. Under this standard, it is immaterial whether the buyer and seller are related – it’s based on a hypothetical buyer and seller. Thus, there is no attribution of ownership between family members that would change a minority interest into a majority interest.

Now, IRS appears to be close to issuing new I.R.C. §2704 regulations that could seriously impact the ability to generate valuation discounts for the transfer of family-owned entities. Continue reading here.

Prior Converted Cropland: A 2015 Review

There has been a lot of discussion lately about clean water. Barring a last-hour injunction, the new Clean Water Rule promulgated by the EPA and the U.S. Army Corps of Engineers will go into effect Friday, August 28. (The United States District Court for the District of North Dakota did issue a preliminary injunction late yesterday. Read about it here: Today's the Day! Or Maybe Not) As we’ve discussed in prior articles, the Clean Water Rule defines “waters of the United States” or those waters subject to the jurisdiction of the Clean Water Act. For land subject to CWA jurisdiction, section 402 authorizes the EPA to issue permits for storm water runoff, and section 404 authorizes the Corps to issue permits for the discharge of fill material. This definition includes a number of exclusions. Many of these exclusions are designed to protect established farming practices.

One Clean Water Act provision with a complicated history is the exclusion for prior converted cropland (PCC). Retained in the new Clean Water Rule is the exclusion of PCC from the definition of “waters of the United States.” Lands that qualify as PCC are beyond the jurisdiction of the CWA. In other words, owners can dredge and fill on that property without obtaining a 404(b) permit. The Clean Water Rule did not change the existing PCC exclusion, which has existed in its current form since 1992. The Rule also provides that even if another federal agency has deemed land to be PCC, the final authority regarding CWA jurisdiction remains with the EPA. Continue reading here.

FAA Streamlines Exemption Process for UAVs

Six months ago we explained the new rules the Federal Aviation Administration (FAA) had just proposed for integrating small commercial unmanned aerial vehicles (UAVs) or “drones” into U.S. airspace. These rules, if finalized, will allow businesses—including farms—to use UAVs in their commercial operations, subject to certain safety requirements. Although the rules will not be finalized for some time and the general ban on commercial UAV flights remains, a number of developments have arisen in recent months to begin opening the skies to many commercial UAVs, including some for agricultural purposes.

Many have written about the importance of integrating UAVs into farming practices. Crop scouting, livestock monitoring, weed identification, and soil fertility management are some of the many potential agricultural uses for UAVs. Hampering the widespread emergence of these practices, however, is the lack of a regulatory framework. As we’ve explained in past articles, until FAA regulations are finalized, farmers may generally fly their UAVs only for hobby purposes. Continue reading here.

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As you know, our work at the Center is dependent on the fees generated by seminar registrations and gifts. If you would like to donate to further the Center's efforts, please contact our Program Administrator, Micki Nelson at micki@iastate.edu or (515) 294-5217. You can also give online with a credit card. We thank you for your generous support.

See You In September?

Our annual September seminars are fast approaching. We have a great slate of outside speakers joining us for our Agricultural Law Seminar on September 17 and our Farm Estate and Business Planning Seminar on September 18. Both seminars are held live at the Quality Inn & Suites in Ames, Iowa. We are also offering a live webinar for both sessions. For more information or to register, please click here.

Recent Case Review

Following is a sample of recent legal cases summarized on our website. See the complete collection here.

CALT does not provide legal advice. Any information provided on this website is not intended to be a substitute for legal services from a competent professional. CALT's work is supported by fee-based seminars and generous private gifts. Any opinions, findings, conclusions or recommendations expressed in the material contained on this website do not necessarily reflect the views of Iowa State University.